I am the founder and CEO of CircleUp, an accredited investor crowdfunding platform focused on consumer and retail companies. Before I started CircleUp, I worked in consumer-focused private equity at TSG Consumer Partners and Encore Consumer Capital. My experience in private equity exposed me to many great consumer and retail businesses that were too small to obtain funding through the traditional private equity channels. I created CircleUp to open up these investment opportunities to more investors, helping the best of these businesses gain access to capital while lowering the cost of investment for individual and small institutional investors. I received my MBA from Stanford and BA from Duke. I also hold Series 24, 63, and 82 licenses. You can connect with me through http://www.facebook.com/CircleUp.

Equity Crowdfunding To WhatsApp: We Got Your Message

When Mark Zuckerberg announced that Facebook was buying WhatsApp for $19 billion, the value of network effects burst back onto center stage. The staggering price tag for an instant messaging company with 450 million worldwide users (but merely 55 employees) was a reminder of the power of networks.

It’s clear that networks continue to create tremendous value as they scale. Added value can be driven not just by how many people utilize a given network but also by the data available within that network.

Network effects, the idea that each user of a service increases the value of that service to other people who use it, are all around us. Some of the most apparent are in communications. You want a phone because other people have a phone, and getting a phone adds value to that entire communications network. We see the same phenomenon on social networks such as Twitter, Linkedin, and Facebook, and in online marketplaces.

As in other online marketplaces, equity crowdfunding is realizing the benefits of network effects including a large amount of beneficial data. An equity crowdfunding platform receives data from both growth companies on the network that are raising capital and from accredited investors seeking private equity investment opportunities.

We now have a wealth of data on revenue, growth rates, and gross margins for consumer packaged goods and retail companies. This aggregated anonymous data is available to those in the network, allowing participants to compare a company’s performance to sector averages. For example, if a food company wants to know average gross margins in the hummus sector, we can provide that data. All the information is anonymous and aggregated so the confidentiality of businesses on the platform is protected.

As we add companies to the platform, there are network effects through the accumulation of more performance data from those added companies. The data becomes even more valuable as we build the data set. This data asset tends to create value to users and, as the network scales, the value of the data increases for all constituents. The food company in the example above should have an easier time determining a market valuation for the business – a surprisingly difficult task for many early stage consumer companies. (Note that the only data we release is anonymized and aggregated). The richness of the data creates a powerful benefit for new users, and the platform overall.

“We do not expect IT- enabled services businesses to have strong patent positions that would prevent anyone from entering a market. Instead, we look for defensibility in data,” says Brad Burnham of Union Square Ventures. “As these systems accumulate data over time, they increase the value of the service and make it more difficult for newer services to deliver an equivalent experience.” (Disclosure: USV is an investor in CircleUp.)

The greater the number of investors and growth companies on the platform, the greater the network effect. More investors may mean companies can raise capital faster and thereby fuel their growth more efficiently. More growth companies seeking capital can lead to more choices for investors, and potentially additional diversification with less time invested in sourcing new deals. As more companies and investors join the platform and the network will continue to grow.

The availability of sector data on the network enhances these network effects. As the platform scales, all types of participants in the network may realize added value. The growing pool of data can help both sides of the marketplace to make better, quicker decisions. This creates a virtual cycle that can increase the value of the network and attracting new investors and businesses. With all this in mind, it is equally important to remember that while the value of more data can be helpful not all raises are successful, investors can lose their money, and investments are risky and long-term.

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